Wal-Mart Cutting Orders as Unsold Merchandise Piles Up

U.S. inventory growth at Wal-Mart Stores Inc. outstripped sales gains in the second quarter at a faster rate than at the retailer’s biggest rivals. Photographer: Patrick T. Fallon/Bloomberg

Sept. 25 (Bloomberg) -- Wal-Mart Stores Inc. is cutting
orders it places with suppliers this quarter and next to address
rising inventory the company flagged in last month’s earnings
report.

Last week, an ordering manager at the company’s
Bentonville, Arkansas, headquarters described the pullback in an
e-mail to a supplier, who said others got similar messages. “We
are looking at reducing inventory for Q3 and Q4,” said the
Sept. 17 e-mail, which was reviewed by Bloomberg News.

U.S. inventory growth at Wal-Mart outstripped sales gains
in the second quarter at a faster rate than at the retailer’s
biggest rivals. Merchandise has been piling up because consumers
have been spending less freely than Wal-Mart projected, and the
company has forfeited some sales because it doesn’t have enough
workers in stores to keep shelves adequately stocked.

“We are managing our inventory appropriately,” David
Tovar, a Wal-Mart spokesman, said today in a telephone
interview. “We feel good about our inventory position.”

The order pullback isn’t “across the board” and is
happening “category by category,” he said in a previous
interview.

“In some cases, we’re going to be taking less, in some
we’re going to be taking more,” Tovar said.

Wal-Mart fell 1.5 percent to $74.65 at the close in New
York for the biggest decline since Aug. 15. The Dow Jones
Industrial Average slid 0.4 percent.

Profit Forecast

U.S. chains are already bracing for a tough holiday season,
when sales are projected to rise 2.4 percent, the smallest gain
since 2009, according to ShopperTrak, a Chicago-based firm. Wal-Mart cut its annual profit forecast after same-store sales fell
0.3 percent in the second quarter. This week the company said it
was adding 35,000 permanent workers and increasing the hours of
an additional 35,000, as well as hiring 55,000 seasonal workers.

Wal-Mart’s order pullback is affecting suppliers in various
categories, including general merchandise and apparel, said the
supplier, who has worked with Wal-Mart for almost two decades
and asked not to be named to protect his relationship with the
company. He said he couldn’t recall the retailer ever planning
ordering reductions two quarters in advance.

The pullbacks for this quarter and next imply Wal-Mart is
expecting softer demand, Robin Sherk, a New York-based analyst
at consulting and research firm Kantar Retail, said in an
interview.

Inventory Goal

Wal-Mart has said in filings that its “corporate goal” is
“growing inventory at or less than the rate of net sales
growth.” For its U.S. segment, the company has hit that goal
only twice in the past 10 quarters, according to data compiled
by Bloomberg News. The last time was four quarters ago.

In the second quarter, U.S. inventory grew at 6.9 percent
and U.S. sales grew at about 2 percent. In the same quarter a
year earlier, inventory increased 3.6 percent while sales rose
3.8 percent. Target Corp. stores and Dollar General Corp. held
their second-quarter inventory gains to about twice the rate of
sales growth versus triple the pace at Wal-Mart.

“Wal-Mart’s inventory is well above their goal,” said
Poonam Goyal, an analyst at Bloomberg Industries. “Most of the
inventory increase was because of missed sales.”

Inventory Increase

Bill Simon, chief executive officer of Wal-Mart’s U.S.
division, said last month that inventory increased due to
“softer than anticipated sales trends, the delay in summer
weather and timing shifts in the receipt of merchandise for
back-to-school and the upcoming holiday season.”

Through yesterday Wal-Mart had gained 11 percent this year,
compared with a 19 percent advance for the Standard & Poor’s 500
Index.

Even as Wal-Mart seeks to clear its inventory, holiday
merchandise is showing up early at stores in states including
Illinois, Texas, California and Colorado, according to workers
at those locations. Some of them said there is already
insufficient room for existing merchandise, forcing them to put
the seasonal goods out as soon as they arrive -- about a month
earlier than usual.

At a store in Boothwyn, Pennsylvania, on Sept. 14, pallets
of Christmas tree lights sat in the middle of an aisle beside
dozens of unopened cardboard boxes of Halloween decorations. A
28-inch light-up penguin was being sold for $19.98 beside
plastic jack-o-lanterns selling for $1.

‘Haphazard Fashion’

It’s a similar scene in Hurst, Texas, said Donna Kennedy-Medford, who has worked at the store for two years.

“This year, there’s more earlier than last year,” she
said of the Christmas items. “We have some of it in the back,
and some of it has been put out on the floor in a haphazard
fashion.”

Wal-Mart is already struggling to keep shelves stocked, in
part because stores lack the manpower to move items to sales
floors from back rooms and shipping containers in parking lots.
The U.S. workforce at Wal-Mart’s namesake and Sam’s Club
warehouse chains fell by about 120,000 employees in the past
five years, to about 1.3 million, according to regulatory
filings. In that time, the company has added more than 500 U.S.
stores through July 31.

Seasonal Merchandise

Because back rooms are often full, seasonal merchandise
such as Christmas decorations sometimes must be moved directly
to the sales floor, said Barbara Gertz, who has worked as an
overnight stocker at the Wal-Mart store in Aurora, Colorado, for
almost five years.

“The bulk of the freight doesn’t usually come until two
weeks before Black Friday,” said Gertz, a member of OUR
Walmart, a union-backed group seeking to improve working
conditions at the chain.

This year is different, Gertz said.

“The aisles in the back room are so backed up with
stuff,” she said. “We brought three pallets of Christmas trees
out to the garden center. We usually do that in mid-October.
We’re filling it up pretty quick for only being mid-September.”

The early Christmas inventory is displacing other items
that are being marked down, Gertz said. Asked about inventory
growth during a call with analysts in May, Carol Schumacher,
vice president of investor relations for the company, said, “we
tend to mark down until we move it out.”

Unloading Sweatpants

That’s the case at Kennedy-Medford’s store in Texas, where
kids’ clothes have sold for as little as 25 cents, she said.

“Just to get rid of things, a lot of stuff is going for a
dollar,” she said. “Sweatpants that used to be $8.96 are going
for $2 just so we can unload them.”

If stores sell out of a particular seasonal category such
as back-to-school or Halloween, they’ll move to the next
seasonal category, Tovar said.

The early arrival of holiday goods is throwing off shoppers
such as Troy Hollar, who regularly shops at Wal-Mart for his
family of seven. Hollar, who worked as a stocker at the
Crawfordsville, Indiana, Wal-Mart until last year, said several
shipping containers used to store early or excess merchandise
were sitting in the parking lot of the local store last week.

“The biggest question I have is: How can they put out this
stuff two months early and they can’t even have regular stuff
out?” said Hollar, who has had trouble finding routine items
such as baby wipes and paper products in stock at the store.
“Most average people wouldn’t consider buying Christmas stuff
for a long time. That’s just wasted space.”